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- Understanding Core Accounting Concepts with a Simple Example | Finance 008A
Understanding Core Accounting Concepts with a Simple Example | Finance 008A
Learn core accounting concepts through a simple example of a vegetable vendor in Finance 008A video. Master these 7 key concepts to easily understand financial statements and accounting information.
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Video Transcript
Friends, welcome to video 8a.
In fact in video 8 we discussed that 7 concepts if they are mastered we can easily understand
all the accounting information, we can understand financial statements and therefore I thought
I will make a few additional videos just to elaborate on those 7 concepts.
So I am going to make 4 videos 8a to 8d elaborating those.
However, I thought it will be a good idea to begin with a simple example to understand
those 7 core accounting concepts.
So friends, to demonstrate these 7 concepts, I am taking an example of a vegetable vendor.
This vegetable vendor begins his business today.
It's his first day.
He begins his business with equity of 1000 Indian Rupees.
rupees.
What does he do?
He buys vegetables in the morning itself worth 1500 rupees by paying whatever he had.
He had 1000 rupees so he pays for them and he negotiates credit from the vendor of those
vegetables for the balance.
So obviously the balance amount that he owes to the vendor is 500 rupees.
1500 worth of vegetables minus 1000 which he pays.
Now what he does is, he sells all his vegetables by the evening for a sum of Rs. 2500.
What he purchased for 1500, he sells for 2500.
But again his customers also don't pay him the full amount.
His customers pay him 2000 Rs. out of 2500 and promise to pay the balance.
and he has full belief and faith that they will indeed pay.
So friends, let's look at his actual...
data in respect of those seven concepts. His beginning equity was 1000 rupees.
Later on we'll talk about what his ending equity was. What I mean by ending is at the end of day
one. What I mean by beginning equity was at the beginning of day one. Now let's look at what was
his income. His income was the sale of 2500. As we discussed in the previous video, income is what we
earn not necessarily what we collect. Of course, the collection has to happen but it may happen a
little later also. The test of whether we have earned it is really whether we have delivered
contractually what we are supposed to deliver. So, by that test he has delivered vegetables
of 2500 contractual price to his customers. What was his expense? His expense was the
vegetables that he purchased in the morning, which he eventually sold. But the cost of
purchase was Rs. 1500.
How much was his inflow?
Inflow is what he actually collected which was 2000 from his customers.
But do you remember in the morning he paid to the business by way of equity a sum of
Rs. 1000.
Now here the vegetable vendor is separate and his business is separate.
When we do accounting for the business we don't mix up his personal cash with the business
cash.
Here we are talking about the inflow in the context of the business only.
At a personal level, he may have his own other inflows.
That's separate.
So what was the inflow for business?
What the business collected from customers to the extent of 2000 and what the vegetable
vendor as an owner, as an equity investor invested by WebEquity in the morning.
That was also an inflow.
So total collection was 3000 rupees during the day.
How much was his outflow?
